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Tuesday, 6 November 2012

ANATOMY OF CORRUPTION: PUBLIC-PRIVATE SECTOR NEXUS

According to OECD, Greece remains one of the most corrupt countries in the world, largely because the institutional structure, both public and private sectors are immersed in corruption as a way of doing business and conducting public policy. While it is true that Greece ranks better in corruption than most of the former Communist bloc countries, it is also true that approximately one-third of the money that circulates is made illegally.

This does not mean just narcotics and prostitution, but rather that the black market economy that extends from illegal petrol to illegal cigarettes are traded as part of a cash economy that evades the tax system in a country whose fiscal structure is part of the reason for the IMF-EU austerity program. How does corruption operate and what is the nexus between public officials and business people; and are politicians alone to blame, or do businesses also have a role in corruption? The example provided below is from a case in Greece and it illustrates the nexus of corruption. With the caveat that this case is based on local versions of how the city acquired its current rental property, and the case has not been proved in a court of law, the evidence to support its validity is overwhelming. The case also illustrates how businesses and government throughout the country use rental properties as a means of kickbacks and overcharges at a time that there is an abundance of government properties, in many cases vacant.

CORRUPT POLITICIANS AND BUSINESSES
To finance his campaign, a mayor of a Greek city, who is a former
businessman in the construction industry, borrows a large sum from a buildings materials company in order to finance several projects and to finance his mayoral campaign. The mayor offers the company signed checks for which there is no money
in the bank - bad checks that can be held by someone who covers them and expects payment at some point of mutual agreement. The expectation is that the mayor will reciprocate, presumably by purchasing materials from the company once he is in office for city construction projects. Each time the city needs building materials, it goes to the company that is holding the mayor's bad checks. The company overcharges the city and reduces the mayor's personal debt as part of a kickback scheme.

When the time comes for the local government to rent a
large office building in order to house all local services in a single
spot, there was a scramble of where to rent in a market that is depressed
and rents are dropping sharply. The best location for the lowest price
office building is available, but the owner refuses to offer bribes to
the mayor and other local politicians waiting in line. Instead he offers a straight deal with a
long-term lease and low rent. The property owner realizes that the building would stay vacant
for at least five years, if not a decade amid a very deep recession, if the city does not lease it. The
mayor refuses the offer, because there are no accompanying
bribes for a long-term lease.

Another businessman in the foodstuffs import industry, but also a reputed money launderer and a narcotics wholesaler, owns several buildings, one of which could be suitable for the local government offices. The food industry businessman purchases the bad checks from the construction materials businessman and then offers the mayor the option of renting one of his buildings in exchange for reducing the mayor's debt and eventually wiping out. The cost for the rental is twice what the city would have paid if the mayor and other local politicians did not receive a bribe. Moreover, there is the stigma on the part of local politicians of renting from a reputed drug lord.

This is an actual case, and one of the more innocuous ones involving the very complex intertwined relationship between government and private sector. The money trail starts with businessmen, making to rounds to politicians who manage public funds, and ends up back in the pockets of businessmen, after some of the wealth is shared with politicians. I repeat that this case is only one of countless ones involving rental properties by government at all levels. The cost of corruption is much higher cost of products and services, concentration of wealth, and widespread cynicism about how institutions really work behind the veneer of democracy.

Does corruption contribute to existing structural economic and fiscal problems or is it a pretext for IMF-style reforms? Does corruption hurt or benefit the economy? If corruption is an impediment to economic growth, why is it that countries with low-level corruption have just as many if not more problems growing the economy as countries with high levels of private and public sector corruption? Finally, is it realistic to divide public sector corruption from the private sector, or does one reinforce the other?

Corruption, the fraudulent method of doing business in the private and/or public sector, transcends geography and historical periods. Aristotle believed that corruption was an act intended for private benefit against the public good. The philosophers of the Enlightenment era set the standard of what is not corruption when they argued in favor of a merit-based system vs. the old regime immersed in nepotism and rooted in aristocratic privilege. The old regime's political economy of agrarian capitalism, at the head of which there was an absolute monarch dominated public service offices, was anachronistic for it clashed with the interests of mercantile and industrial capitalism that required talented people rooted in a code of professionalism to manage both the public and private sector institutions.

There is no doubt that it helps a company - exporter of products or services like a bank, etc. - to have a friend in government. This was evident in the 19th century across Europe, given that certain companies and banks received contracts and government protection, while others did not. Government made or broke companies, although it was very difficult to determine the degree of influence companies enjoyed in policy making; something that was as true of British companies as it was of German, French or US. In the process, businessmen became wealthy, and along with them politicians, some of whom were actually former businessmen turned politicians.This tradition continued in the 20th century, as it was clear that government had to be entrusted to former businessmen or at least lawyers whose law firms represented large businesses.

The fundamental question is whether corruption by itself is:
1. an impediment to economic growth and stability;
2. undermines social justice;
3. undermines confidence in public and private sector institutions, thus in democracy;
4. passes socioeconomic costs from the current generation to the next;

The answer to all of these questions is a resounding YES. However, this is not to say that even in the total absence of corruption the cyclical nature - expansion and contraction cycles - of the market economy can be avoided with all of their societal consequences. In other words, even if it were possible to eliminate corruption totally, capitalism operating under its own market-oriented laws, presumably unaltered by corrupt bankers, politicians and others, would still cause the problems associated with contracting cycles because capital would remain concentrated.

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